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Chap001 Solution Manual

2 return on assets seems satisfactory for the risk

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Unformatted text preview: 2. Return on assets seems satisfactory for the risk involved in the manufacturing, marketing, and selling of cellular telephones. Moreover, Nolan’s 22% return is nearly double that of its competitors’ 12% return. 3. We know that sales less expenses equal net income. Taking the sales and net income numbers for Nolan we obtain: $455,000 - Expenses = $55,000 Expenses must equal $400,000 . 4. We know from the accounting equation that total financing (liabilities plus equity) must equal the total for assets (investing). Since average total assets are $250,000, we know the average total of liabilities plus equity (financing) must equal $250,000 . 1-35 Chapter 01 - Accounting in Business Problem 1-11A (20 minutes) 1. Return on assets equals net income divided by average total assets. a. Coca-Cola return: $6,906 / $44,595 = 0.155 or 15.5% . b. PepsiCo return: $5,979 / $37,921 = 0.158 or 15.8% . 2. Strictly on the amount of sales to consumers, Coke’s sales of $30,990 are less than PepsiCo’s $43,232. 3. Success in returning net income from the average amount invested is revealed by the return on assets. Part 1 showed that PepsiCo’s 15.8% return is slightly better than Coca-Cola’s 15.5% return. 4. Current performance figures suggest that PepsiCo yields a marginally higher return on assets than Coca-Cola. Based on this information alone, we would be better advised to invest in PepsiCo than Coca-Cola. Nevertheless, and particularly since the returns are only marginally different, we would look for additional information in financial statements and other sources for further guidance. For example, if Coca-Cola could dispose of some assets without curtailing its sales level, it would look more attractive. We would also look for consumer trends, market expansion, competition, product development, and promotion plans. Problem 1-12A A (20 minutes) Case 1 Return : 4% interest or $40/year. Risk : Very low; it is the risk of the financial institution not paying interest and principal. Case 2 Return : Expected winnings from your bet. Risk : Depends on the probability of your team covering the “spread.” Case 3 Return : Expected return on your stock investment (both dividends and stock price changes). Risk : Depends on the current and future performance of Yahoo’s stock price (and dividends). Case 4 Return : Expected increase in career earnings and other rewards from an accounting degree (less all costs). 1-36 Chapter 01 - Accounting in Business Risk : Depends on your ability to successfully learn and apply accounting knowledge. 1-37 Chapter 01 - Accounting in Business Problem 1-13A B (15 minutes) An organization pursues three major business activities: financing, investing, and operating....
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